This week the federal government announced a proposal to close tax loopholes it says will stop rich people from “gaining tax advantages that are not available to other Canadians.”

The language will sound familiar to anyone who followed the Liberals during the election campaign. Even the relatively dry discussion paper the finance department released makes repeated mentions of “strengthening the middle class.”

The government now plans to consult on the issue until Oct. 2. Here’s how the proposed changes will work.

What would this proposal change?

The government says it’s trying to fix three issues with the tax code. First, it will try to put a stop to “income sprinkling,” where money is transferred from a family member in a high tax bracket to one in a lower bracket, via wages in a corporation. Tax officials will have the difficult task of distinguishing between actual income based on a family member’s contribution to the business and money that is paid to avoid taxes.

The government also wants to stop people reaping the benefits of investing through a corporation. Income in a business is taxed at a lower rate than personal income so, although investments are taxed similarly, there would be more money to invest by keeping it in the business. The new proposals try to walk a tightrope between encouraging business owners to actively invest in the company and killing the advantages of investing passively inside a corporation.

The third proposal is more complicated and tackles a less-common practice: It tries to stop people from funnelling income through several corporations in order to pay the capital gains tax rate, instead of the personal income rate.

How much revenue is being lost through these loopholes?

The government estimates that preventing income sprinkling alone could bring in $250 million. Economist Michael Wolfson, who has written extensively on the subject, estimates the number at about $500 million, after including both federal and provincial revenue.

Revenue from the other proposals is harder to guess at, because we don’t know exactly how people will respond to the changes.

Tax forms.Getty Images

How will this affect me?

Unless you’re taking advantage of these loopholes, it won’t really affect you directly. If you are, well, get ready to pony up.

If the proposals work, it could mean the government will have another few hundred million dollars to spend. Critics say the changes could make Canada less attractive to entrepreneurs, which would affect the country’s economic growth. That eventually hits the pocketbooks of ordinary Canadians.

Why should we care about fairness in the tax system?

As an example, the finance department describes how a self-employed woman making $220,000 could save $25,000 on her tax bill by sprinkling that income to her spouse and grown child. It’s a substantial savings, and a serious loss of revenue for the government.

Wolfson said it’s bad for society to have some people paying a lower effective tax rate than their neighbours, especially if they’re making more money. Over time, it can exacerbate income inequality if too many of these little loopholes go unfixed. “This is not a recipe for social cohesion,” he said.

Who will be opposed to this?

For one, people who benefited from this loophole. Wolfson said the number of doctors creating corporations has been rising and he has even received a few angry emails after publishing papers explaining these loopholes.

Economist Jack Mintz criticized the proposals in an opinion piece in the Financial Post, saying it would discourage entrepreneurship in Canada. If the U.S. government passes a business-friendly tax reform bill, Mintz worried that “even more young entrepreneurs will be looking to head south instead of (staying) here.”

Mintz also disputed the government’s claim that it will only target the rich, saying many middle-class business owners would be affected.